Launch of targeted lending in 2024.

Launch of targeted lending in 2024.

We already have a publication about how the MFI is arranged (it’s time to expand it, but later, maybe this is a very voluminous issue) and there is an article about the BNPL device. These materials explain that there are different types of loans and what BNPL is.

Different sources give different definitions of targeted lending:

Today, we see how rapidly the provision of targeted lending services is expanding in our market, new players are appearing, old players are releasing new products. BNPL and Islamic banking appeared before our eyes in Russia. These new products are successfully used by classic banks or their subsidiaries.

These products have already found a place next to the usual types of loans. For example, Yandex made a long-term product in which it offers a bank target loan for a period of more than 2 months. It turned out an interesting product, both from the point of view of mechanics and from the point of view of the same identification. The boys have a bold approach, one can only welcome this.

Alfa is also developing its BNPL product “Podily”. In addition, it is a classic BNPL, which is provided by a separate LLC, rather than the bank itself. Tinkoff made a marketplace based on their BNPL.

MTS launches new products. They have a huge potential, that is, clients of the bank and the operator, there are stores that work through the terminals of MTS Bank, and there is a scoring system that allows you to calculate credit limits for clients. It is only necessary in one of their many applications to display the catalog of stores, credit limits and make clear mechanics for the purchase. In stores, you need to update the software on the terminals, of course.

Today’s article will be the launch of targeted lending from scratch by classic MFIs, banks or LLCs, if it is BNPL.

At the same time, there can be several different reasons, including those that I did not list.

  • Profitability: PSK in POS – 27-42%, and in PDL or installments – 104-292%. These are very different numbers. Especially given the fact that money for MFIs costs 13-21% depending on the source of attraction and the desire of our Central Bank to “target inflation”.

    That is why there are workarounds on the market with BNPL, issuance to a virtual card with subsequent debiting from it, as well as other workarounds that allow you to work with higher profitability.

    But even with a rate of 80-100%, the situation is acceptable. when an MFI financier looks at these figures and at 292% in another product, and cannot understand why.

  • Graph engagement model: First of all, you need stores that will sell goods to their customers using your product.

    Buying “urgent online credit card” traffic and finding a store that will offer your product instead of/together with Halva, Doly, brokers, etc. are completely different tasks.

    The secret of success in the market lies in anchoring large clients with whom you have either common shareholders, or you are lobbied by a friend/matchmaker/brother, or you have agreed with LPR, whom you properly and timely thank for mutually beneficial cooperation.

    Since the number of “big guys” in the country is limited, you will have to look for medium and small online and offline customers with whom you need to learn to work. Working with 10,000 ISPs and small LLCs in different regions of the country and working with one M-Video are two different jobs, especially from the point of view of scoring and fraud prevention. I can say that the most successful players in this market do not know how to work with such clients.

    Another option for attracting stores to lending is selling this service to an already existing customer base. For example, Sber, Tinkoff, Alfa, MTS or Kiwi already provide their clients with acquiring services. Stores are already involved and can be connected to the targeted lending service. Marketplaces that have their own credit solutions through banks/MFIs operate according to the same principle.

  • Monetization: If your strategy is more complicated than issuing a target loan and when it closes, offering PDL, then you have to train a customer from one store to buy with your product at another store, then at a third, and then offer him to withdraw cash ( non-targeted loan). But it will have to be packaged differently and, most likely, not at the full rate of 0.8% per day (for MFIs) – clients who take a targeted loan and who take a PDL at the full rate are in different audiences.

    This is a separate topic altogether. It is clear that the base of customers who take a target loan and who take a PDL or installment at the full rate are mostly different customers.

    However, there are successful examples of such a simple model (cross client from POS to installment without organizing complex mechanics) on the market.

    The task was solved at the same time simple and at the same time very difficult – a stable flow of leads from several understandable large clients was established. The stream will speed up, appear, fade out and cross over to other products of the company. The number of large clients is gradually increasing, and successful and not so successful experiments are being conducted with smaller clients.

    The source of fraud or high default traffic is shut down.

    With each reduction in the lending rate, there is an opportunity to attract a wider audience. The rate of 40-60% per annum is still not covered by banks or MFIs.

  • Stagedness: There are examples on the market of some companies that try to skip the stage of a target loan and immediately issue a more profitable product under the guise of a target.

    If you issue loans here at a full interest rate of 0.8% per day, it will be difficult to achieve success.

    The same Paylate or Mokka successfully replace other types of targeted loans with their loans and issue them with a yield of up to 100% and a little more. But these companies have large anchor customers on which the business rests.

    Not sure if this story is easy to repeat.

  • Scoring and model: Scoring is a strong point of modern MFIs. They work more flexibly than banks, check and accept the worst quality of customer service. But the peculiarity of working with targeted loans is that a different model will have to be built for them. For 10 years, MFIs have refined their customer verification model on PDL and believe that they immediately have the competencies to work with POS.

    If an MFI tries to apply a scoring model for installments or PDL to targeted loans, it will get the wrong results. For example, a bad customer for targeted loans may be more likely to get a positive decision for a POS loan.

    At the same time, MFIs definitely have analysts or financial directors who are able to calculate or give the correct task for developing a model:

    1. Customer acquisition cost

      • First, stores with their client audience are involved, then other stores are involved in this audience.

      • When the planned number of loans per 1 client in this system is reached, it makes sense to attract new clients – individuals

    2. Scoring (approval level)

    3. Turnover (default level)

    4. The number of repeated loans to reach the break-even point

    5. % of customers to cross to a more profitable product

    6. Profitability of the client for all time

    7. Economy of the entire project

  • Cannibalizing a high-profit product with a less profitable one: If we talk about launching targeted lending by a microfinance company with PDL or installments, then attracting a customer to the POS and, after he reaches certain indicators, offering him a more profitable product can be a good strategy. It is not necessary to immediately offer an installment/PDL at the full rate.

    Now, whether it is worth immediately giving customers the opportunity to take a targeted loan instead of a PDL or an installment is already a difficult question. You can test the model and roll out the POS to some part of the active customer base – offer customers in some separate region with a sufficient number of stores for the test the opportunity to go to these stores and buy goods on credit/installment (I will use “on credit/installment” even for loans, as it is a clear term). You can even calculate and withdraw credit limits for customers.

    But, if the MFI has a successful, highly profitable business, then the reasons for such actions should be very strong and very well calculated. And trust in these calculations should be very high.

    Where to start?

  • Banal, but start with a plan. Preferably for several years. Use your strengths in the plan. Agree the plan with all key employees who will implement it. It should not turn out that after the stage of attracting customers and issuing one or more loans, you do not know what to do with them next. Or suddenly marketing or risk will say that these customers will not switch to a more profitable product.

    Your target lending startup may end up in the planning stage. This is also a good option.

  • Choose the model by which you will develop:

    1. Classic POS-loan/loan – attracting a targeted loan, further upselling on more profitable products

    2. Installment cards

    3. BNPL – installment from LLC, further development in the form of bank loans

    4. Installments under the guise of POS – issuing to a card and subsequent payment. Further upselling of more profitable products

    5. Secured loan in the guise of POS

    6. Islamic banking

    Each of these options has its own nuances. Before choosing one of them to start your product or to change the model, try to understand how this or that project came to this model.

    BNPL and Islamic banking will require setting up a new company. BNPL needs an LLC and is not sure that an MFI or a classic usurious bank will be able to work with Islamic lending, where the lending institution itself must also work and other principles.

  • Assemble a separate team for a new product:

    This is where it will be helpful to find a team or leader with experience and/or understanding of what needs to be done from scratch or what needs to be changed in the current IT product to launch targeted lending.

  • Give the team time, clear priorities and proper evaluation of the results of their work:

    Here I will give an example: pdl or installment – more profitable products. And, if you already have them working, then the financial result at certain stages will be better than the results of targeted lending in advance. This does not mean that the team performed worse.

    If only such an assessment is possible, then, most likely, it is not worth starting, so you will create an environment in the company that is impossible to achieve goals. There will be high turnover and low results.

  • Be prepared for a long time for the product to reach the set profitability parameters

    Continuation in the next part. Thank you for attention. Constructive criticism is welcome.

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